making your business less taxing

Summer Budget 2015 – How Much Will It Cost You?

The Summer Budget of 8 July 2015 was reportedly an expensive one for the owners of small limited companies. Let’s take a look at the most noteworthy measure – the new dividend tax. How much will it cost you?

At present a company pays 20% corporation tax on its profits after which dividends are paid out effectively tax free to basic-rate taxpayers.

Starting 6 April 2016 all taxpayers will be able to receive £5,000 of dividends tax free but will then pay 7.5% Income Tax until they reach the higher rate tax band on income over £43,000 after which they will pay 32.5% Income Tax on remaining dividends.

Let’s take a look at some common scenarios:

Typical husband and wife company with profits of £20,000 after directors salaries
Husband and wife can continue to receive a salary of around £8,000 each + dividends of £8,000 each all tax free.

In this case the husband and wife will receive £32,000 from the company and will not incur any additional personal Income Tax under the new rules. In fact their company will eventually benefit from a cut to corporation tax from 20% to 18% by 2020 and save, in the above scenario, £400+ per annum.

Typical husband and wife company with profits of £30,000 after directors salaries
Again the company would continue to pay the usual £8,000’ish salaries and in this case could afford to pay £12,000 dividends each.

Together the husband and wife receive £40,000 but would have a personal Income Tax bill of around £300 each. Yet in this case also the company will eventually benefit from the planned cut to corporation tax and save around £600+ per annum. No overall tax increase.

True, there are those at the top end of the scale that will pay as much as £1,700 more Income Tax for the year 2016/17 but it seems that even that increase will eventually be neutralised by the corporation tax saving.

The new dividend tax has reduced the attraction for new businesses to immediately incorporate but it doesn’t offer an incentive for dis-incorporation either. A limited company continues to be the most tax efficient trading vehicle for most small businesses.